Interest rates stay on hold

The Bank of England today kept interest rates on hold at 4% for the fifth month in a row - although economists warned the low level of borrowing will not last.

The widely-expected decision comes amid concerns that consumers were living beyond their means and building up high debts.

Retail sales figures have shown there is no let up in spending on the high street, while house prices have rocketed ahead and forecast to continue to rise.

In addition, recent borrowing data has shown consumers using credit cards to fuel their buying, with people putting a record amount on plastic during February.

Other data has shown a pick-up in the economy following last year's post-September 11 faltering, with manufacturing showing signs of recovery while the service sector was bouncing back.

The improving picture means economists now forecast the Bank's Monetary Policy Committee will start cranking up rates sooner rather than later, following the seven cuts last year which took the cost of borrowing to its lowest for nearly 40 years.

Last year's cuts - made to fend off an expected collapse in consumer confidence in the wake of the September 11 terrorist attacks - in all knocked more than £100 a month off the average homeowners' mortgage and has buoyed the consumer spending spree.

Economists are now predicting rates will be raised in the summer, meaning mortgage payments would increase and consumer spending would be reigned in.

Forecasts of a rise vary from June to August although some think it may come as early as May.

However the Bank is still seeing some calls for lower rates. Amicus union said at least 60,000 manufacturing jobs will be lost between now and the political conference season in the autumn unless action was taken to reduce the value of the pound.

Amicus told the Bank of England that jobs will continue to "haemorrhage" if interest rates were not cut.

Geoff Dicks, economist at Royal Bank of Scotland, said the decision was "as widely expected".

"Some City economists think the first rise will come in May, but I think that is premature. The most likely timing, I think, is August," he said.

Stephen Radley, chief economist, at the Engineering Employers' Federation said: "Today's decision is the right one as there continues to be little inflationary threat at the factory gate, on the high street or in the workplace.

"Talk of increases in interest rates is premature as any rise would only serve to stop the tentative recovery dead in its tracks."

Ian Fletcher, chief economist at the British Chambers of Commerce, said: "Business welcomes the continued steady course being ploted by the MPC. With inflationary pressures remaining subdued it is right to ensure that growth remains secure at home, whilst fledgling signs of global recovery become more conclusive.

"Our only concern would be if the MPC knows something we don't and its inaction is the precursor to significant tax rises in the Budget.

This could throw a spanner in the works of growth at home and whilst it may even offer the chance of further interest rate cuts in the short-term, business would fear the longer-term impact on incentives."

Ian McCafferty, chief economic adviser at the CBI, said: "This was the right decision. There is little evidence that the growth of borrowing caused by this period of low rates is leading either to overheating or to consumers overextending themselves.

"With inflation well under control and pay settlements slowing, the Bank had no reason to rock the boat.

"The economy still needs time to build on the recent early signs of recovery. There is no reason why rates cannot stay at this current level for some time to come."